As spring approaches and new projects begin, it is a good time to assess current fixed assets and evaluate them for impairment. According to Governmental Accounting Standards Board (GASB) Statement No. 42, “Governments are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred.” The first question all entities should address is What is an Impairment? Asset impairment is defined by the GASB as a significant, unexpected decline in the service utility of a capital asset. The determination of an impairment is done in a two-step process: (1) identify potential impairments risks, and (2) test for impairment. A variety of factors should be considered in identifying and testing for impairment including, but not limited to, physical damage, changes in laws or regulations, changes in environmental factors, changes in technology or evidence of obsolescence, changes in the manner or duration of use, or construction project stoppage or abandonment.

For example, a City ABC provides utility services including water service. Recently, the Federal government enacted new policies regarding water quality standards. City ABC has determined its current facility is unable to meet new standards and is unable to be retrofitted to do so in the future.

Two factors in determining impairment should be present:

The magnitude of the decline in service utility is significant.

The decline in service utility is unexpected.

In consideration of the example –

Is the magnitude of the decline in service utility significant? Yes. Continued operation and maintenance will result in expenses that are much higher than the benefit being derived from the current facility as it is unable to use the facility to provide water service.

Was the decline in service utility of the asset unexpected? Yes. It was unforeseen to management at the time of construction of the facility that regulations would change prior to the end of the facility’s useful life.

In this blog we take a deep dive into leases and the changes that are coming. Two types of leases currently exist under generally accepted accounting principles for both the FASB (Financial Accounting Standards Board) and the GASB (Government Accounting Standards Board) – operating leases and capital leases. An operating lease is essentially renting where the payments are considered operational expenses and the asset being leased is not reported on the balance sheet. This type of lease can be typically seen with office equipment or rental space. In contrast, a capital lease is treated as a loan where the asset is reported on the balance sheet and payments are recorded against the outstanding “loan” balance until full ownership of the asset is complete. This type of lease can typically be seen with vehicles and heavy equipment.

New changes will now require all leased items to be treated in a manner consistent with accounting for capital leases. Both FASB and GASB have taken the stance that leases that were previously reported as operating leases actually convey the “right to use” an underlying asset for a period, therefore, that use should be reported as an asset on the books and amortized for the proper useful period. These changes were made in an effort to increase transparency and disclosure surrounding what was previously considered to be “off-balance sheet financing.”

New standards are effective for all entities for fiscal years starting after December 15, 2019, except for public business entities which will be effective for fiscal years starting after December 15, 2018.

These links will provide more disclosure and detail regarding these new standards:

In order to prepare for these new lease standards, we recommend all clients take an inventory of all leases, gather all important documents in a file (especially those that outline the current lease terms), and assess each current lease as operating or capital under the current standards. The new standards will require a retrospective implementation so having all information available at audit time will help with the adoption of this new guidance. Please feel free to reach out to our office with questions!

Securities offered through 1st Global Capital Corp, Member FINRA & SIPC. Investment advisory services offered through 1st Global Advisors, Inc. We currently have individuals licensed to offer securities in the states of Illinois and Missouri. This is not an offer to sell securities in any other state or jurisdiction. Insurance services offered through 1st Global Insurance Services, Inc.